Adani Enterprises shares stable: Will arbitrage strategies work?

Pricing at a discount but shorting the stock ahead of the FPO won't be as straightforward

Shares of Adani Enterprises (AEL) were stable on Friday after crashing nearly 4 per cent on Thursday. The stock has declined more than 15 per cent in the past one month ahead of its Rs 20,000-crore follow-on public offering (FPO).

AEL on Wednesday set the price band for the FPO between 9 per cent and 13 per cent lower to that day’s closing price at Rs 3,112-Rs 3,276 per share. Retail investors—those applying for shares worth less than Rs 2 lakh—are getting an additional discount of Rs 64 per share.

Selling pressure during any kind of follow-on share sale is not uncommon as arbitrage traders look to sell shares already listed in the secondary market and seek to subscribe to discounted shares. However, this strategy may not be as straightforward for Adani’s FPO, which will be open between January 27 and January 31.

Why so?

Analysts said the Gautam Adani-led firm has hit a masterstroke by issuing partly paid-up shares that will trade separately until they are fully converted.

“A simple arbitrage strategy won’t work in this FPO. Technically, you cannot sell in the secondary market and apply for the same shares in the FPO. The partly paid-up shares will only get converted into fully-paid shares over up to 18 months,” said a quantitative analyst, who advises clients on such strategies.

AEL is raising Rs 10,000 crore in the first tranche. The rest will be raised from investors through one or two additional tranches over an 18-month period. Until then, AEL’s partly-paid shares will trade separately on the bourses, just like in the case of Reliance Industries (RIL), following its Rs 53,124-crore rights issue in 2010.

Analysts said the partly paid-up shares of AEL would trade at a premium-to-intrinsic value as long as the fully paid shares are in the money (above FPO price).

“Those subscribing to partly paid-up shares will be locking themselves at the FPO price. The subsequent payments will have to be made at a later date. Technically, the interest costs get embedded in the pricing,” explained an analyst, citing the example of RIL whose partly-paid shares traded at double their intrinsic value in 2020.

Unlike RIL, AEL has not yet decided on the call dates for the subsequent tranches upfront. The Mukesh Ambani-led firm collected just 25 per cent in the first tranche for its right issue in May 2020. The balance in two tranches of 25 per cent in May 2021 and 50 per cent in November 2021.

“By not deciding the call option dates, the company will have the flexibility. In the event the price of the fully-paid shares slips below the FPO price, the company can delay the call option date,” said an investment banker.

When asked if volatility was a concern for raising Rs 20,000 crore in one go, Adani Group’s Chief Financial Officer Jugeshinder Singh said, “We can’t make decisions based on short-term volatility. We cannot be swayed by short-term movements in stock prices. We aim for long-term capital creation.”

According to the red herring prospectus, AEL plans to use Rs 10,869 crore of the FPO proceeds for funding capital expenditure requirements of its subsidiaries, which undertake projects in areas such as green hydrogen, airports, and roadway construction. Another Rs 4,165 crore will be used for debt repayment; the balance for general corporate purposes.

Adani Group said on Thursday it does not intend to be in telecommunications, but it plans to enter water purification, treatment and distribution as this is a key element of its core business of infrastructure.